NVIDIA vs SMCI, Which AI Stock Is Better?

Artificial intelligence has been a driving force behind the U.S. stock market’s 20% plus rise in the past year. However, now that datacenters and AI chips are being implemented at scale, earnings releases are being scrutinized even more heavily to see if the massive investments will yield the promised returns.

No stock has exemplified the AI boom more than NVIDIA (NASDAQ: NVDA). The semiconductor company makes the chips that power artificial intelligence, and investors have flocked to it in droves. This summer, NVIDIA momentarily became the largest company in the world, surpassing the market capitalizations of both Apple and Microsoft.

Unfortunately, concerns about the true impact of the technology fueled doubts about AI stocks. Those concerns coupled with lingering macroeconomic malaise drove a massive selloff of NVDA in recent weeks, though the stock is still up 122% in the past 12 months alone.

The NVIDIA selloff is a natural response to the company’s skyrocketing valuation and reflects a tempering of AI hype but make no mistakes about it, AI still has plenty of impactful applications. Among the two top stocks in the area are NVIDIA and Super Micro Computer, Inc. (NASDAQ: SMCI), often called Supermicro, which makes high-performance liquid-cooled AI servers, but which is best?

Why Did NVIDIA Stock Fall?

NVIDIA shares are now down over 18% since the late-August when CEO Jensen Huang reported the company’s latest, stellar earnings results for the second quarter of fiscal 2025.

NVIDIA generated revenues of $30 billion, which was up 122% year-over-year. It was also 4.57% better than the $28.7 billion analysts expected.

NVIDIA’s net income of $16.6 billion was a 168% improvement over last year, and adjusted earnings per share were $0.68 compared to analysts forecast EPS of $0.64.

NVIDIA sells its chips to some of the largest technology companies, including Microsoft, Google, and Meta, and the chips power most generative AI apps, including Open AI’s ChatGPT. However, many of those tech giants have explored producing AI chips of their own.

NVIDIA does have a next-generation version of its AI chip on the way, and it began shipping samples in fiscal Q2. Still, the company faces stiff competition from rival AMD, which sells chips cheaper.

Why Did SMCI Stock Drop?

Supermicro has been able to carve out a niche in AI due to its servers, which are often used to house NVIDIA GPUs.

The company is still a relative upstart in the market, but it’s a growing market. Indeed, demand for AI servers is expected to grow at a compound annual rate of 25% through 2029.

SMCI skyrocketed this year on the company’s potential, and the stock was up almost 360% in the first three months of the year. Investors have since lost faith in the company as concerns over accounting practices grew, and the stock has dropped 68.5% since March.

In the fiscal fourth quarter of 2024, Supermicro reported revenues of $5.3 billion, which was a 143% year-over-year jump. Q4 revenues eclipsed analysts’ estimates by 0.09%.

The company reported net income of $352.7 million, reflecting an 82% increase from last year but diluted EPS of $5.51 underperformed analysts’ estimates by over 23%.

While the earnings miss was concerning, more disturbing issues arose. Hindenburg Research, a short-seller, recently accused Supermicro of accounting manipulation. Hindenburg said the server company was using partial orders of defective products to inflate its revenue, and there were multiple red flags in Supermicro’s accounting process.

Supermicro responded that it would need additional time to investigate the allegations and to analyze its financial reporting procedures.

Analysts’ Ratings For NVIDIA and SMCI Stocks?

In the wake of the allegations, analysts from JPMorgan downgraded SMCI. Now, 10 out of 18 Wall Street analysts rate the stock as a hold with an average price target of $694.46. That still would represent an impressive 80% increase over the next year if it came to fruition.

There are 7 Buy ratings on SMCI, with a high forecast of $1,300, which corresponds to a 236% gain over the next 12 months. Just one Sell rating exists on the company, and the lowest forecast estimates SMCI will fall by 34% to $255 per share.

Wall Street is far more bullish on NVIDIA. Of the 62 analysts covering the firm, 58 assess NVDA to be a Buy. The highest forecast for the stock is $200 per share, translating to 94% gain from where the stock currently trades.

The average price target is $149.12 per share, a 45% gain over the next 52 weeks. No Sell ratings are in place on NVDA, but there are four Hold ratings, which come as little surprise given the monumental move in recent years. The lowest forecast pegs fair value at $90 per share, representing a 12.5% drop.

Which Stock Is More Undervalued: SMCI or NVIDIA?

While both stocks have room to rise, the cohort of analysts covering both stocks largely stand in agreement that the ceiling is higher for SMCI.

Following the substantial recent selloff, it appears more undervalued when comparing the price-to-earnings multiple versus that of NVIDIA. SMCI’s P/E ratio is 18.7x versus 47.6x for NVIDIA.

A discounted cash flow analysis pegs fair value for NVIDIA at $105 per share suggesting very little upside left whereas SMCI has downside risk to $363 per share.

NVIDIA Vs SMCI, Which AI Stock Is Best?

With its rapid revenue growth, enormous margins and strong cash flows, NVIDIA is the better AI stock right now. 

NVIDIA has been the darling of the industry which has dominated investors’ attention over the past year. For that reason, NVDA reached stratospheric heights, which raised concerns about whether the company’s valuation was justified.

While there are competition concerns for NVIDIA, the company has a stranglehold on the AI chip market. Supermicro, on the other hand, is trying to break into a market that is dominated by Dell and Hewlett-Packard.

That’s not as concerning as the allegations that Supermicro has manipulated its accounting, and the company’s lack of a definitive rebuttal. There will likely be uncertainty around the company, and volatility around the stock, for some time to come.

Though NVDA might have been due for a step back, management reported a stupendous quarter and the AI leader is poised to continue its domination. That means the selloff is more likely an opportunity for investors who missed out on the stock the first time around.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.